Ladies and gentlemen, thank you for standing by, and welcome to the NV Energy First Quarter 2012 Earnings Conference Call. [Operator Instructions] And as a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Max Kuniansky. Please go ahead.

Max Kuniansky

Good morning, everyone. Thank you for joining us. By now, you've seen the press release we issued earlier today and the slides on our website.

Comments we make during this call may include forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding the future performance of the company and its subsidiaries, Nevada Power Company and Sierra Pacific Power Company. Forward-looking statements include earnings guidance and estimates or forecasts of operating and financial metrics. These statements reflect current expectations of future conditions and events and as such are subject to a variety of risks, uncertainties and assumptions that could cause actual results to differ materially from current expectations. Slide #2 gives you more information on the assumptions and factors we consider in making these forward-looking statements and where to go to get more information on our risk factors. You'll also find reconciliations of certain non-GAAP financial information on our website at www.nvenergy.com.

With us this morning are Michael Yackira, President and Chief Executive Officer; and Dilek Samil, Senior Vice President, Chief Financial Officer and Treasurer.

I'll now turn the call over to Michael.

Michael W. Yackira

Thank you, Max. Good morning, everyone. Thanks for joining us this morning. Today marks an important milestone for NV Energy. This morning, we announced plans for deploying a portion of our free cash flow over the next several years. Those plans include a change in our dividend payout, a dividend growth policy and debt reduction. We also initiated earnings guidance. Dilek and I will discuss these items this morning, and we will also be in New York on Wednesday, May 16, for meetings with the financial community. Invitations to that event will be sent today. For those of you who can't be there in person, it will be available to the public via a live webcast on nvenergy.com.

Let me begin with our dividend increase. Yesterday, NV Energy's Board of Directors declared a cash dividend of $0.17 per share payable on June 20, 2012. This is an increase of $0.04 over the quarterly dividend of $0.13 per share paid in March 2012, a 31% increase to our current dividend. Our policy will be to target a dividend payout ratio in the range of 55% to 65%. Given our current expectations for earnings and cash flow, this should allow us to increase dividends by about 10% annually for the next few years. Thereafter, our policy will be to grow dividends in line with sustainable earnings growth.

This is an important step for our company. During a period of high growth and capital investment, we kept our dividend payout low in comparison to the industry since we are raising capital for construction, primarily for our generation fleet. I'm proud of NV Energy's accomplishments in growing a portfolio of clean, efficient-generation assets that are providing benefits to our customers in the form of more stable and affordable power prices.

What we experienced is different from the growth in capital spending cycle that utilities typically experience. While generation investment is usually made in anticipation of increasing load, followed by a period of return on and of capital, it was different for NV Energy. Our capital requirements were greater than a normal generation expansion since we were not only building to meet growth but we were also replacing purchased power with highly efficient, self-owned generation as we emerge from the Western energy crisis.

Even as we're investing large amounts of capital to build out our generation portfolio, we recognize the need to return capital to our investors. That is why reinstituted our dividend in 2007. As I mentioned, our payout was below the industry average, reflecting the need to finance our large investment program. With the completion of the generation build-out and the associated increase in and stability of company's earnings power, we believe it is important to provide our investors a dividend payout that is more in line with our peers.

We're targeting a dividend payout of 55% to 65% of earnings. We believe our projected cash flow over the next several years will allow us to comfortably pay out at this level while improving our balance sheet and preparing for the next investment cycle.

Let me now turn to earnings guidance. As you know, NV Energy had not previously provided such guidance. However, we are entering a period of greater earnings stability. We have said in the past that we will continue to revisit our policy on guidance, and we have done so. Needless to say, this change in policy will not change our business philosophy. We'll always run our business for the long-term benefit of our constituents, customers, employees and our investors. For 2012, we are initiating earnings guidance in the range of $1.15 to $1.25 per share. Our guidance is based on a number of assumptions, as shown on Slide 4. Dilek will provide further details later in this call.

Let me now turn to our outlook beyond 2012. There are several factors that will impact our earnings and our ability to grow earnings. These are summarized on Slide 5 and include changes in the Nevada economy, our ability to continue to control costs due to rate changes and the use of our available cash flow to retire debt and reduce interest expense.

We are confident that we have minimized our exposure to a flat economy. On the other hand, we are also well positioned to benefit from a pickup in the economy. We have seen some early positive signs but have not yet seen evidence of significant, consistent growth in employment in our state. It's unlikely that we'll see customer growth return to the historic 5% or 6% anytime soon, if ever, but any growth to the top line will benefit earnings as we continue controlling O&M costs. While known investment, expense reductions and sales growth will drive our earnings in the near term, in the long term, earnings will be driven by our ability to find and make prudent new investments.

As I've said in the last earnings call, we are focused on 3 options for the use of our free cash flow: paying out a higher dividend, reducing debt and reinvesting within our core competencies. These are not mutually exclusive options. We can do all 3 at the same time. We are confident that we can deliver on dividend growth and debt reduction. Seeking new investments, however, will require patience. New investment opportunities like building transmission for export will take time to develop. Some will become a reality and some may not.

The China Mountain Wind Project is a good example of the latter. We recently ceased participation on this project due to a 2-year permitting delay for a new environmental impact study planned by federal authorities. In all cases, we will be selective in evaluating new opportunities and invest our shareholders' capital only where we see a clear path to earning an appropriate return.

In summary, we are very excited about our prospects over the next several years. In the near term, we expect stable earnings, sustained free cash flow and growing dividends. At the same time, we will continue to patiently search for ways to invest in our business as the Nevada economy and the broader Western energy markets begin to grow again.

Now I'll turn the call over to Dilek.

Dilek L. Samil

Thank you, Michael. Before we discuss our earnings guidance, I'd like briefly to cover our financial results. For the first quarter of 2012, we reported net income of $12.2 million or $0.05 per diluted share as compared with net income of $2.3 million or $0.01 per share for the same period a year ago.

Major drivers of our first quarter results are shown on Slide 6. Gross margin increased by $29 million, driven by the rate increase approved by the Public Utility Commission effective January 1. Our customer base expanded modestly. However, this was partially offset by the effect of weather, which was milder than last year and milder than normal.

Below the gross margin line, we had higher depreciation and lower AFUDC. This was largely due to the Harry Allen plant, which came online in May of last year. Of course, we're now recovering the Harry Allen costs in gross margin due to the rate increase I just mentioned.

Despite the increased cost in this new facility, I'm pleased to report that we held operating and maintenance expense virtually flat in the first quarter compared to the same period a year ago. Interest expense decreased by about $3 million primarily due to last year's refinancing activity. This isn't readily apparent from our financial statement since the savings is offset by the lower AFUDC I mentioned earlier.

In summary, results for the first quarter were in line with our expectations and consistent with the earnings guidance we announced this morning. As Michael mentioned, for the full year 2012, we expect to earn between $1.15 and $1.25 per diluted share. As important as it is to share this range with you, equally important to review the key driver. Clearly, weather has a big impact on our performance, particularly in the third quarter, as shown in Slide 7.

Our 2012 earnings guidance assumes normal weather for the year. We also assumed modest growth in kWh sales due to customer growth, attributing to margin growth of just under 1%. As a rule of thumb, every 1% increase in our gross margin benefits earnings by about $15 million pretax. And of course, the biggest impact on margin growth for 2012 is higher revenues associated with the December 2011 rate decision.

On the expense side, managing, operating and maintenance expense is critical to our earnings projection. Given the expense reductions we have achieved over the last several years, holding O&M flat will be even more challenging as we go forward. For 2012, we believe we can achieve our goal, but we can be impacted either negatively or positively by unexpected events such as unusual weather, planned outages, required accounting adjustments and other risk factors mentioned in our SEC filings.

Depreciation expense is another major driver. 2012 depreciation will increase relative to 2011 with the annualization of the Harry Allen plant and other capital addition. Higher depreciation and lower AFUDC due to a full year of Harry Allen will reduce 2012 earnings by about $25 million pretax.

On the positive side is interest, which we expect to be lower in 2012 as we realize the savings from refinancing and debt reduction. Last year, we refinanced nearly $450 million of debt at lower interest rates. And just last month, we paid off the $130 million maturity of 6 1/2% bonds with a combination of lower-cost debt and cash. To repeat one more time, our earnings guidance range for 2012 is a normalized expectation. As I mentioned earlier, we assume normal weather and no regulatory or accounting adjustments or unusual items.

With those caveats, we're comfortable with our range for 2012 for several reasons. First, we're entering a period of less need for major rate relief. In addition, we have a strong track record of managing our operations and maintenance expense. We will continue to focus on lowering costs without impacting the quality of our service.

Before we take the questions, I'd like to cover some balance sheet items. Consolidated liquidity was $800 million as of March 31, including cash of about $100 million. Our debt ratio was about 55% at the operating utility and 60% on a consolidated basis.

Slide 8 shows projected capital expenditures through 2016. This forecast is unchanged since our last conference call. Total expenditures are still projected to drop significantly this year and to decrease further in the years ahead by our new investment opportunities, but we still expect to have sustained free cash flow for the next several years.

With that, Michael and I will now take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question is from Kevin Cole from Credit Suisse.

Kevin Cole - Crédit Suisse AG, Research Division

With the -- I guess just kind of like thinking about the, I guess, the sources of the debt reductions that you've mentioned, does this go beyond reduction of the holdco debt and kind of working to the idea of rebalancing the capital structure of the utilities as well?

Dilek L. Samil

Yes, as we've talked about before, we'd like to move the operating companies closer to the capital structure of our peers. So that's the first goal. But I think it's important to remind everybody that if you look at our balance sheet, we have refinanced a great deal of our highest coupon debt. So the opportunities going forward will really be to take out debt as they come due, and the $130 million retirement that I just mentioned is a good example. Over the next several years, we've got about $700 million of debt that's coming due, and that's mostly at the operating lease [ph].

Kevin Cole - Crédit Suisse AG, Research Division

And I believe the commission indicated that they are keen to the idea of getting your equity layer up as well. Would they like to see this done in, I guess, a quicker fashion or just kind of naturally through debt -- through not rolling the debt as you kind of described?

Dilek L. Samil

I don't think I should be speaking for the commission. I think I'll just repeat what I said. It makes sense for us to get closer to our peers and get ready for our next investment cycle. And I think that's a reasonable thing to do.

Kevin Cole - Crédit Suisse AG, Research Division

Okay. And I guess just my last question on the dividend. How many years of the 10% dividend increase do you expect to get you comfortably within the 55% to 65% range?

Michael W. Yackira

Kevin, it's Michael. We said the next few years. We don't have a specific trajectory for that to talk about at this stage, but hopefully, with our earnings guidance that we're giving now, with a goal of being between 55% to 65% and saying that we'll be at 10% for the next 2 years will give you that trajectory. But as we get closer to next year, we'll be providing more information.

Operator

Our next question is from Kit Konolige from Konolige Research.

Kit Konolige - Konolige Research, LLC

So a couple of questions. One, I noticed no specific growth rate for EPS going forward. Can you speak to that at all, or should we just try to back that out from the targeted payout ratio and the 10% dividend growth?

Michael W. Yackira

I think the latter would be a better way to do it. But we do try to define on the Page 5 of the slides what the key factors beyond 2012 will be without being specific. But hopefully, it will give you better clarity with the combination of the information we provided this morning as well as our outlook beyond this year.

Kit Konolige - Konolige Research, LLC

And then, Dilek, you were mentioning that O&M clearly has been kept under strong control, and it may be more difficult going forward to -- I'm not sure I heard exactly what you were saying there. Will it be difficult to keep it at 0 growth? Or how should we think about O&M going forward, and what would be the important components of that?

Dilek L. Samil

It's going to get increasingly more difficult, Kit. That's what I was saying. I apologize if you didn't hear me. But we are confident that we can achieve that goal in '12, and we're going to continue to keep that front of mind as we go into '13 and '14. As we've said before, a key driver of that is technology, NVEnergize being a good example, where we can get more efficient and provide better service to customers. So as I've said in the past, I can't give you specifics, but our organization continues to rise to the challenge. And for '12, we're very confident that we're going to get there.

Operator

And our next question is from Neil Mehta from Goldman Sachs.

Neil Mehta - Goldman Sachs Group Inc., Research Division

On guidance, I just wanted to confirm that you're expecting to introduce guidance annually now. And is the goal going to be to introduce that guidance at the beginning of your fiscal year?

Michael W. Yackira

That's likely it, Neil, and obviously, as time goes on, we will either confirm the guidance that we're giving, or if there are changes, we'll certainly announce those. But our plan is to announce the guidance as we come into the new fiscal year.

Neil Mehta - Goldman Sachs Group Inc., Research Division

And how do you think about rate case timing at NVE North and NVE South, and how does the ON Line transmission project play into that in terms of when you have to file at NVE North?

Dilek L. Samil

Well, as you know, we're still operating under regulations that mandate that each of our utilities file every 3 years. The next scheduled filing is for NVE North in the middle of next year, and so barring any changes to that regulation, that's what we would expect to do. And the mandated filings for our southern utility would be middle of '14. We had talked about a merger filing in conjunction with the completion of our transmission line. That's still in our plan, and that merger filing would be just that, a merger filing. And we would then have a decision to make as to when to file a rate case that would bring our 2 utilities together, and we haven't set any date for that latter filing.

Neil Mehta - Goldman Sachs Group Inc., Research Division

And then finally on demand, we saw growth in residential and commercial demand on the quarter despite unfavorable HDDs. Can you talk about what's going on there, and then also some of the weakness at the industrial customer segment in the quarter?

Dilek L. Samil

I think it's probably not meaningful to look at any one quarter. Having said that, we do take a little bit of comfort from the fact that the number of customer accounts seems to be growing quarter after quarter. Not by a huge number, but it is positive, so that's good news. And like you said, we were pleasantly -- I won't say surprised, but we were pleased by the fact that we saw a little bit of growth in residential and commercial sales despite the mild weather. And I think I would point you to Slide 9, which shows the decline in our low- and 0-use accounts. So I think that's what we're seeing the benefit of in kilowatt hour sales.

Neil Mehta - Goldman Sachs Group Inc., Research Division

And last question, when do you think you're going to be a cash tax payer? I'm just trying to build out the free cash flow outlook here. I know that's an important component.

Dilek L. Samil

Oh, my goodness. If you can tell me what tax regulation and bonus depreciation is going to look like over the next several years, then I can pinpoint with great clarity what's in here [ph]. But based on what we know today, we think it's going to be several years before we're a cash tax payer.

Operator

And our next question is from Paul Ridzon with KeyBanc.

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

You just touched on kind of the demand forecast, but any update on the root cause on the towers?

Michael W. Yackira

Well, there's no update at this stage. When there's additional information, we'll be filing an 8-K. But we're continuing to do what we said we're going to do, and that's analyze what the defects are and work on a solution for those. But there is no further update.

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

And kind of construction is basically halted until that root cause is determined?

Michael W. Yackira

Doing whatever we can to continue to build foundations and other things, but we're not putting up any more towers until we know what the fix is.

Operator

Our next question is from Brian Russo from Ladenburg Thalmann.

Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division

Just to clarify on the $700 million of primarily utility debt maturities over the next several years. Can we assume that that will all be paid down or that some of that will be refinanced with lower-cost debt?

Dilek L. Samil

Thank you for the clarification or the opportunity to clarify. I was just offering that up as an example of what we could do. At this point, we don't have a specific plan on how much we would take out and how much we would refinance. Rather I was trying to point to the opportunity that we've got to improve our balance sheet. But it's going to be a combination of both leaning towards retirement.

Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division

Okay. And you mentioned the goal of getting the subsidiary equity ratios up closer to peer comparisons. Should we use 50% as kind of a benchmark or just a mid-to high-40% level?

Dilek L. Samil

We've been targeting 50%. Our aspirational goal is 50%.

Operator

Our next question is from Andy Bischof from Morningstar.

Andrew Bischof - Morningstar Inc., Research Division

Just a clarifying question on your debt repayment. You mentioned $130 million. Can you break that up between what was refinanced and what you paid down with cash?

Dilek L. Samil

That $130 million has all been taken out. At the end of March, we were sitting on about $100 million of cash. Over the next summer months, which are high cash-usage months, we'll take out some bank debt to offset it, but by the end of the year, it will all be out.

Operator

Our next question is from Jay Dobson from Wunderlich Securities.

James L. Dobson - Wunderlich Securities Inc., Research Division

Michael, maybe talk a little bit about the investment side, the sort of 3 options you look at between dividend increase and investments and debt reduction. Just sort of what you're looking at there with a little more sort of granularity, understanding there's a level of patience that's appropriately necessary here.

Michael W. Yackira

As we've said for a while, we are not going to stray from our core competencies. When we look at what our investment opportunities are, they will be focused on generation and transmission and generation in a traditional sense and renewable generation also. But as you well know, this is not a business where you can say, "If you build it, they will come." You have to have a clear path to investment returns, and we continue to look at those kinds of opportunities but are not scurrying around just saying, "Let's do it for the sake of doing it." China Mountain is an example. It's too bad that that ended the way it did, but it is the fact of life dealing in our state. So we have a state that's 87% owned by the federal government, and requires a lot of things like environmental impact studies. So while Secretary Salazar and Senator Reid have done some very good things in moving the ball forward -- yesterday is an example. There was a renewable project that was announced yesterday as a result of fast-tracking that BLM did -- there are still impediments to making these transactions. Another is assuring that California wants to take the renewable energy that is plentiful in our state and use it towards their -- meeting their portfolio standard. So all these are driven by some things that are out of our control. But we continue to look very carefully what these opportunities are, and when we find them, and we'll invest in them, we will be able to explain to you and our investors and analysts why it makes sense for the company to do so. I wish I had more specifics, Jay, but that's the way we think about it generally as a management team and as a board.

James L. Dobson - Wunderlich Securities Inc., Research Division

No. No, that's fantastic. Just one more clarifying or incremental question on that topic given the -- I guess you energized the project yesterday that you're purchasing the power from, but it's all on BLM land. With what you learned there, does that make development with a partner on BLM land more likely?

Michael W. Yackira

Well, again, I'm not sure that makes it more or less likely, but I will say that a couple of years ago, the federal government, specifically Senator Reid and Secretary Salazar, have made it their goal to allow BLM land permitting to happen more quickly for renewable energy development and transmission development. This is an example of that. There are more examples of that throughout the West, but I'm pleased to see that that's happening in Nevada, and I'm expecting that will happen more often in Nevada. Perhaps that will get us an opportunity to invest either directly or in partnership, but time will tell.

James L. Dobson - Wunderlich Securities Inc., Research Division

No, that's great. And then just one clarifying question, Dilek. On page 6, in the sort of major drivers for the quarter, there's an item listed as trust gains and settlements that added $0.01. And I just wondered, I didn't hear you sort of identify what specifically that was.

Dilek L. Samil

First quarter, we had some investment gains on trust for benefit plans, Jay, and it was the -- as you can see, the impact was rather small, but we did want to point that out.

Operator

Our next question is from Shar Pourreza from Citigroup.

Shahriar Pourreza - Citigroup Inc, Research Division

If you assume the midpoint of your guidance range for 2012, what kind of an earned ROE are we assuming off the regulatory rate base and a 10% allowed ROE?

Dilek L. Samil

Let me start by changing the question around a little bit. GAAP ROE based on the midpoint of that range is about 8%. In terms of our regulatory ROE, you'll remember that there's a gap or a difference between our regulatory ROE and our accounting ROE because of some legacy issues that we get to recover but don't earn a return on. So let's talk about the regulatory ROE. If you look at what we earned in '11 in the northern utility, we're very close to earning our allowed return. And in the South, we will catch up as the effects of this last rate case work their way throughout the year.

Shahriar Pourreza - Citigroup Inc, Research Division

Very helpful. Can you just remind us what the O&M savings is from the NVEnergize for this year and going forward?

Dilek L. Samil

I don't think we spoke specifically about this year's impact, but on an annualized basis, once the project is completely in service, we said the run rate of savings would be about $25 million, of which half of that we said is O&M. So about $12 million annually once everything is complete. And we also pointed out that we'll be working our way to that $12 million as portions of the project is complete. So you'll remember that we started in the South, and we're just about done in the South, and so those benefits will be realized in 2012. And then, as I've said before, once the whole thing is complete, we'll see about $12 million over the course of the year.

Shahriar Pourreza - Citigroup Inc, Research Division

And we don't see any impact to the $12 million in O&M savings from some of the opt-out provisions that we're seeing in the northern and southern utilities?

Dilek L. Samil

Our expectation is that that's going to be a very small number.

Operator

And our next question is from Andy Levi from Avon Capital.

Andrew Levi - Caris & Company, Inc., Research Division

I'm all set, actually.

Operator

[Operator Instructions] We have a follow-up question from Paul Ridzon.

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

What was the -- can you kind of quantify the impact of weather in the cents per share or gross margin number? And did you contemplate that in your guidance when you said normal weather for the year, or is that just lost in the range given it's only the first quarter?

Dilek L. Samil

The first quarter -- let's see, where's that -- our chart on the quarterly earnings? On page 7, you can see where we make our money. It's in the third quarter. So while we had mild weather in the first quarter, and -- we quantify that to be right around $0.01. Our range assumes normal for the year.

Operator

And at this time, there are no further questions in queue.

Michael W. Yackira

Thanks very much for joining us this morning, and we look forward to seeing some of you next week in New York.

Operator

Thank you, and ladies and gentlemen, this conference will be made available for replay after 9:30 today through June 8. You may access the AT&T TeleConference replay system at any time by dialing 1 (800) 475-6701 and entering the access code 244930. International participants can dial (320) 365-3844. That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.

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